Fashion Clothiers Inc.
Assume that Fashion Clothiers Inc.uses 1,440,000 yards of material each year.Further, assume that Fashion can order the material at a cost of R2 per yard, plus fixed ordering costs of R100 per order.The firm's carrying cost is 20 percent of the inventory value, at cost.
-Refer to Fashion Clothiers Inc.Now, suppose the manufacturer offers a discount of 0.5 percent for orders of at least 40,000 yards.Should Fashion Clothiers increase its ordering quantity to take the discount?

Question

Quizplus · Accepted Answer

First, let's calculate the total cost of Fashion Clothiers' current ordering policy:

- Ordering cost per order = R100
- Number of orders per year = Total yards used per year / Yards per order = 1,440,000 / 40,000 = 36
- Total ordering cost per year = Number of orders per year * Ordering cost per order = 36 * R100 = R3,600
- Yards per order = 40,000
- Total yards ordered per year = Yards per order * Number of orders per year = 40,000 * 36 = 1,440,000
- Total inventory value = Yards per order / 2 * Cost per yard = 20,000 * R2 = R40,000
- Carrying cost per year = 20% * Total inventory value = 20% * R40,000 = R8,000
- Total cost per year = Total ordering cost per year + Carrying cost per year = R3,600 + R8,000 = R11,600

Now let's see what happens if Fashion Clothiers increases its ordering quantity to take the discount:

- Discount per yard = 0.5% * R2 = R0.01
- New cost per yard = R2 - R0.01 = R1.99
- Yards per order = 40,000
- Total yards ordered per year = 1,440,000
- Number of orders per year = Total yards ordered per year / Yards per order = 1,440,000 / 40,000 = 36
- Total ordering cost per year = Number of orders per year * Ordering cost per order = 36 * R100 = R3,600
- Total cost of material per year = Total yards ordered per year * Cost per yard = 1,440,000 * R1.99 = R2,863,200
- Total inventory value = Yards per order / 2 * Cost per yard = 20,000 * R1.99 = R39,800
- Carrying cost per year = 20% * Total inventory value = 20% * R39,800 = R7,960
- Total cost per year = Total ordering cost per year + Total cost of material per year + Carrying cost per year = R3,600 + R2,863,200 + R7,960 = R2,874,760

The difference in cost between the two policies is:

- Savings = Current total cost per year - New total cost per year = R11,600 - R2,874,760 = -R13,160

Therefore, Fashion Clothiers will lose R13,160 if it takes the discount, so the best choice is not to take the discount.

Fashion Clothiers Inc. Assume That Fashion Clothiers Inc.uses 1,440,000 Yards of Material Each